The Finance Act 2020 introduced Section 115BAC in the Income-tax Act, 1961 (“the Act”) with effect from Financial Year 2020-21 (relevant to Assessment Year 2021-22) wherein an option has been granted to individuals and Hindu Undivided Families (HUFs) to avail reduced slab rates subject to various conditions, including inter alia that such person does not claim specified tax exemptions/deductions. This option is to be chosen annually while filing the return of income for each year by an individual or HUF not having any business income.
The issue that arises here is at what rate should employers deduct tax at source {TDS) u/s 192 of the Act. Further, whether the employer should give an option to employees to select the new tax regime or not for the purpose of determining TDS u/s.192 and if yes, how many times should such declarations be taken during the Financial Year.
Section 2(9) of the Finance Act 2020 provides that income tax is to be deducted from salaries u/s. 192 of the Act at the ‘rates in force’ specified in Part III of the First Schedule. Part III of the First Schedule specifies slab rates as per the old tax regime for deduction of TDS on salaries u/s. 192. However, for the purpose of payment of “advance tax” by an individual, the first proviso to section 2(9) of the Finance Act 2020 provides the option to the individual to pay advance tax at the reduced rates specified in Section 115BAC contained in Chapter XII of the Act.
On a strict interpretation of Section 2(9) of the Finance Act, 2020, the first proviso to the said section and Part III of the First Schedule, an inference can be drawn that employers have not been given the option to deduct TDS on salaries u/s. 192 as per the rates specified in Section 115BAC but employees have the option to pay advance tax by taking benefit of Section 115BAC. Accordingly, even if an employee declares that she/he intends to opt for the new tax regime specified u/s. 115BAC, the employer is mandatorily required to deduct higher TDS u/s. 192 as per the slab rates specified under the old regime.
Issues that may arise on account of the above discrepancy between the manner of deduction of tax u/s. 192 by employers and payment of advance tax by employees:
In case an employee declares to the employer that she/he will be opting for Section 115BAC and does not make any investments/payments in tax saving schemes (such as PPF, LIC Premium, Tax Saving MFs, NPS, etc.): In such case, there would be higher tax outgo and reduced salary-in-hand for the employee since the employer is required to deduct TDS u/s. 192 as per the old tax regime. The employee would need to claim the refund of excess TDS deducted while filing the return of income.
Secondly, there will be a mismatch of income as appearing in the TDS return filed by the employer and the income declared by the employee in his return of income, in case the employee opts for Section 115BAC. This may lead to unintended consequences of adjustments while processing returns u/s. 143(1) and blocking of refunds due on account of excess TDS deducted by employers.
The CBDT issues a detailed circular for TDS on salaries u/s. 192 for each Financial Year in Dec/Jan of such Financial Year. However, employers are required to deduct TDS on salaries on a monthly basis and declarations are obtained from employees at the beginning of the Financial Year. Until further clarification is received from CBDT, it is advisable to deduct TDS u/s. 192 on salaries strictly as per the position of law laid down in Finance Act 2020 as on date.
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